Cumberland Pharmaceuticals Inc. — Form 10-Q Summary
Business Context and Reporting Period
Cumberland Pharmaceuticals is a specialty pharmaceutical company focused on acquiring, developing and commercializing branded prescription products, primarily for hospital acute care and gastroenterology markets. The filing covers the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. The financial statements are unaudited.
Financial Performance and Position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net revenues | $7.9 million | $9.7 million | $25.5 million | $27.6 million |
| Operating income | $0.3 million | $1.0 million | $0.9 million | $2.6 million |
| Net income attributable to common shareholders | $0.1 million | $0.7 million | $0.6 million | $1.8 million |
| Diluted EPS | $0.01 | $0.04 | $0.03 | $0.10 |
| Operating margin | 3.4% | 10.2% | 3.7% | 9.5% |
| Net margin attributable to common shareholders | 1.6% | 7.7% | 2.3% | 6.4% |
- Q3 revenue declined 19.0%; nine-month revenue declined 7.6%.
- Cash provided by operating activities was $4.6 million in the first nine months, compared with $4.0 million in the prior-year period.
- Cash and cash equivalents totaled $38.3 million at September 30, 2015, and marketable securities totaled $14.4 million, for total cash and marketable securities of $52.8 million.
- Working capital was $55.8 million, with a current ratio of 5.7.
- The company had $1.7 million outstanding under its revolving credit facility and $10.3 million of stated availability. The facility bears interest at LIBOR plus a spread, representing 1.2% at September 30, 2015, and is secured by substantially all company assets.
- The company was in compliance with its debt covenants at September 30, 2015.
- Net cash decreased $1.5 million during the first nine months, primarily because of share repurchases, the Vaprisol contingent consideration payment and investments in intangible assets.
Material Changes Versus the Prior Comparable Period
- Acetadote revenue decreased $1.2 million in Q3 and $2.6 million year to date, primarily because of generic competition. Authorized Generic revenue distributed by Perrigo declined to $1.1 million in Q3 and $3.3 million year to date, from $1.4 million and $4.6 million, respectively.
- Omeclamox-Pak revenue declined $0.3 million in Q3 and $1.1 million year to date, reflecting lower sales volume and reduced co-promotion support.
- Kristalose revenue was essentially flat in Q3 but increased $1.3 million, or 11.5%, year to date, aided by pricing and lower managed-care deductions.
- Vaprisol revenue increased 8.7% year to date, primarily from additional ownership time, pricing and sales volume.
- Caldolor revenue declined 57.1% in Q3 but increased 2.9% year to date. Q3 performance was affected by the return of competing products following shortages, wholesaler and hospital buying patterns, and a temporary lack of international sales.
- Research and development expense increased $0.8 million year to date, including a $1.2 million FDA fee related to the Caldolor pediatric supplemental application and continued Boxaban and Hepatoren clinical studies.
- Amortization expense increased $0.4 million year to date due to additional product and license rights, capitalized patents and patent defense costs.
- The company repurchased 712,134 shares for approximately $4.7 million during the first nine months, compared with 576,978 shares for approximately $2.7 million in the prior-year period.
Guidance, Outlook, Commentary, Risks and Unusual Items
- No formal numerical revenue or earnings guidance is provided in the filing. Management expects 2015 Caldolor revenue to exceed 2014 levels but cautions that quarterly results may fluctuate.
- Management expects further Acetadote and Authorized Generic revenue reductions as a result of generic competition.
- International Caldolor sales were expected to resume in the fourth quarter of 2015 after supply issues.
- The company expects to pay minimal income taxes in 2015 because of approximately $43.6 million of unrecognized net operating loss carryforwards related to nonqualified stock option exercises.
- An arbitrator ruled in Cumberland’s favor against Mylan, enjoining Mylan and affiliates from selling, delivering or giving away injectable acetylcysteine products until April 30, 2018, and awarding Cumberland reimbursement of related attorney fees and costs.
- A federal court upheld Cumberland’s Acetadote patent and found Mylan liable for infringement. Mylan filed an appeal on October 30, 2015. The outcome could affect Acetadote competition, revenue and market exclusivity.
- Three additional Caldolor patents were issued during the quarter. Cumberland also reported positive preliminary findings from Hepatoren and Boxaban Phase II programs, but further analysis and development remain necessary.
- Key risks include generic competition, patent challenges and appeals, product supply interruptions, dependence on third-party manufacturers and distribution partners, clinical and regulatory uncertainty, acquisition and integration risks, and reliance on a limited portfolio of products.
- The company extended its Nashville headquarters lease through October 2022. The chief executive officer assumed the principal financial officer role after the vice president and chief financial officer transitioned out effective October 14, 2015.
Important Facts for Investors to Verify
- Whether the Acetadote patent ruling survives appeal and whether additional generic entrants affect future sales.
- The sustainability of Kristalose and Vaprisol growth and the degree to which Caldolor revenue normalizes after competitor supply conditions improve.
- Progress, safety, efficacy and funding requirements for the Hepatoren and Boxaban Phase II programs and the FDA response to the Caldolor pediatric application.
- Remaining availability, interest rate and covenant requirements under the revolving credit facility.
- Potential inventory obsolescence, particularly for Caldolor; cumulative reserves for potential obsolescence and discontinuance losses were approximately $2.8 million at September 30, 2015.
- The effect of the CFO transition, future share repurchases, contingent legal recoveries and any additional litigation or patent proceedings.